September 2023 | Volume 5
KNOWLEDGE HUB: INSIGHTS AND INFORMATION
The Impacts of Rising Interest Rates in the Commercial Market
Rising interest rates in the commercial market can have significant impacts on commercial real estate investors. The anticipation of rate resets and market dynamics can play a significant role in determining when and how properties come onto the market. To fully understand this market and the future of the market over the coming years, an investor should understand commercial loan terms.
Commercial loans have fixed terms, typically 5 years, after which the interest rate can be reset. This also provides property owners with an opportunity to shop for competitive rates. If interest rates have increased drastically in those five years, the owner might also choose to sell the property. Before this rise in interest rates, investors were willing to part with an asset in the middle of a term. Now, with higher interest rates, investors are more likely to hold these assets, rather than selling mid-term. As investors hold these assets, it can lead to stagnation in the commercial real estate market. Property owners are less inclined to sell their properties because they would face higher financing costs if they were to reinvest in new properties. This could result in a lack of inventory on the market, which is what Lonicera is seeing today.
However, low interest rates from 2020 and 2021 will come to term in the next few years. As the terms for these loans expire, investors expect that more properties will be placed on the market. Some investors in the commercial real estate market coined the phrase “survive to 2024”. These investors expect properties to come on the market in 2024 in anticipation for these interest rate resets. Though this market stagnation is challenging and competitive, Lonicera is actively searching for potential investments. Lonicera expects the market to become more favorable in 2024.
COMMERCIAL LEASING OUTLOOK
Commercial leasing activity tends to dip during the summer months. This may be surprising as it is an inverse relationship with the housing market. While the housing market aligns with warmer weather and academic calendars, commercial markets are driven by children returning to school, business planning, tax and year-end considerations. Though the number of leases signed in the summer of 2023 were lower than the previous two years, we do not expect this trend to continue throughout the rest of the year.
WHAT THE TEAM IS READING
Article by Alyssa Mercer
"Freakonomics" is a popular book written by economist Steven D. Levitt and journalist Stephen J. Dubner. The book takes an unconventional approach to economics by exploring various real-world phenomena and events through an economic lens, often revealing surprising and counterintuitive insights. Some of the key topics include information asymmetry, causality, and data analysis. The authors examine how people respond to incentives and how these incentives drive human behavior. They provide examples from diverse fields, such as sumo wrestling, parenting, and crime.
"Freakonomics" is known for its engaging storytelling and its ability to make economics accessible and intriguing to a broad audience. It has spawned sequels, a documentary film, and a podcast series, all of which continue to explore the fascinating intersection of economics and everyday life.
Since Lonicera Fund IV closed mid April, the team has been actively looking towards Fund V. Although we are currently in Columbus and Indianapolis, we continue to analyze deals throughout the Midwest to ensure we are pursuing the best opportunities for our investors.
If you have any questions about Lonicera Investments, our past performance, or our future, please reach out. We would be happy to sit down with you and answer any questions you have!
ANY ESTIMATES OR PROJECTIONS AS TO EVENTS THAT MAY OCCUR IN THE FUTURE, INCLUDING PROJECTIONS OF REVENUE, EXPENSE AND NET INCOME CONTAINED IN THIS VALUATION SUMMARY OR ANY OTHER OFFERING DOCUMENTS, ARE BASED UPON THE BEST JUDGMENT OF THE COMPANY’S MANAGEMENT AS OF THE DATE OF THIS VALUATION SUMMARY OR THE APPLICABLE OTHER OFFERING DOCUMENT. WHETHER OR NOT SUCH ESTIMATES OR PROJECTIONS MAY BE ACHIEVED WILL DEPEND UPON THE COMPANY ACHIEVING ITS OVERALL BUSINESS OBJECTIVES AND THE AVAILABILITY OF FUNDS. THE ESTIMATES AND PROJECTIONS NECESSARILY MAKE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS, TAXES AND OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. THERE IS NO GUARANTEE THAT ANY OF THESE PROJECTIONS WILL BE ATTAINED. ACTUAL RESULTS MAY VARY FROM THE PROJECTIONS, AND SUCH VARIATIONS MAY BE MATERIAL. THE COMPANY HAS NO OBLIGATION TO UPDATE OR OTHERWISE REVISE THE ESTIMATES OR PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING OR DEVELOPMENTS OCCURRING AFTER THE PREPARATION OF THE ESTIMATES OR PROJECTIONS OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.